The exempt vs non-exempt employee classification is a very important consideration for employers. As a business owner, there is every need for you to understand the positions of your employees and the category each of them belongs to.
If you're able to rightly classify your employees, you will be able to know which compensation and overtime rules apply to them. This is important because failure to properly adhere to the compensation and overtime standards may attract severe penalties to your business.
What does exempt vs non-exempt mean?
The term Exempt vs Non-Exempt comes into play when the matters of employee compensation and overtime payment arise. It is a way of classifying employees according to their eligibility for overtime pay.
The privileges that are available to exempt employees may differ from the ones that non-exempt employees can enjoy. The terms of eligibility differ too. To understand these things better, let's consider who an exempt vs non-exempt employee is.
Define an exempt vs a non-exempt employee.
Exempt employee definition:
Exempt employees refer to workers in the United States who are not entitled to overtime pay. This simply implies that employers of exempt employees are not bound by law to pay them for any extra hours of work. The federal standard for work hours in the United States is 40 hours per workweek.
According to the Federal Labor Standard Acts (FLSA), federal law requires that employers in the United States pay employees at least the federal minimum wage. The minimum wage as stated by the United States Department of Labor is $7.25 per hour. Bear in mind that some states such as California may have other rates according to their different state laws.
Exempt employees are mostly paid on a salary basis and not per hour. Unlike non-exempt employees, employers may decide whether to pay exempt employees for any extra work outside the official 40 working hours per week. As a business owner, this allows you flexibility in your payment and employee benefits policies.
As an employer, you may implement employee benefits policies to suffice for overtime pay. This may help improve your employee loyalty as it tends to boost their working conditions. Also, if you consistently require any of your employees to work overtime, they may negotiate for possible overtime benefits.
There are certain conditions an employee must fulfill before you can classify them as an exempt employee. Some of these criteria include:
Exempt employee classifications include:
- The employee receives their payment on a salary basis
- The employee receives at least $684 per week.
- Up to 10% of this standard salary level may consist of non-discretionary bonuses and other incentives
- Most exempt employees occupy executive, administrative, and professional positions in their companies.
- They can also be outside sales employees or computer personnel.
Non-exempt employee definition:
Non-exempt means an employee is not exempted from overtime pay. Employees in this category typically receive hourly wages for their work and are entitled to overtime pay. The overtime pay must be at one-and-a-half times the normal wage rate.
Non -exempt employee classifications include:
- Non-exempt employees are usually paid at least the federal minimum wage amount.
- Some states may establish different minimum wage laws (where an employee is under both federal and state minimum wage laws).
- Typically receive hourly wages.
- Typically shift workers, staff, or contractors.
How do you determine the salary of an exempt vs non-exempt employee?
As a business owner, you must understand how to calculate the salary of an exempt vs non-exempt employee. This will enable you to ensure that your employee payment complies with the appropriate legal standards. You can integrate a payroll solution into your business to help you manage and automate your payroll processes.
To be able to determine the salary of a non-exempt employee, you have to consider the applicable overtime pay.
For a better understanding, let us take for instance an employee who worked for 56 hours in the third week of February 2021.
We assume that the employee's regular pay rate is $20 per hour.
The standard work-week hours are 40 hours per week. So, this employee worked 16 hours overtime for the week (56 - 40). The salary is:
Regular pay = 40 x $20 = $800
Overtime pay = $20 x 1.5 x 16 = $480
Total pay: Regular Pay + Overtime pay: $800 + $480 = $1280
For exempt employees, only workers who earn below $684 per week may get paid for overtime. The calculation for overtime pay follows the same procedure as already illustrated above.
However, note that different states may have different rules applicable to their overtime pay, minimum wage, and working hours. Endeavor to find out what applies in your state to minimize the risk of non-compliance. For instance, you can find out how to calculate overtime in California and see how it differs from the federal standards.
What are the benefits of working with an exempt vs non-exempt employee?
Hiring an exempt vs non-exempt employee has a bearing on your payroll. As such, it is important you carefully consider the implications of both employee classes on your business before you hire them.
Benefits of working with an exempt employee:
- You are not required to pay overtime. This can be a plus for you in the sense that the number of hours they work for you doesn't have any effect on the amount you pay.
- You do not need to bother about compliance with the Federal Labor Standards Act. Since exempt employees are not subject to the act, you are not prone to any possible consequence for non-compliance.
- You can boost employee loyalty by offering them overtime benefits. The key part is that you are totally in charge of the terms of the benefits.
Benefits of working with a non-exempt employee:
- Even though you pay for overtime, you can rest assured that you are paying for only the hours worked for. This can help you predict and schedule your budget better.
- Overtime pay can motivate employees to do more. You may not even need to have an extra overtime benefit, which may eventually end up costing much more.
What are the downsides to working with an exempt vs non-exempt employee?
There are usually two sides to a coin. For a better decision, you need to weigh the pros and the cons to figure out which option is more profitable.
Downsides of working with an exempt employee:
- Overtime pay can be a motivation for employees especially if your company regularly requires overtime activities.
- Most exempt employees are skilled and experienced and as a result, are more expensive to hire and sustain.
Downsides of working with a non-exempt employee:
- You must pay for overtime. If your business requires frequent overtime, this may become a financial burden.
- Failure to adhere to FLSA standards may attract serious penalties.
What else do I need to know?
It is important to note that the overtime pay exemptions provided by the FLSA do not apply to "blue-collar" or manual labor workers. According to the Overtime Fact Sheet by the FLSA, only white-collar workers may be exempted from the overlay rules.
Also, the exemptions do not apply to police officers, detectives, inspectors, investigators, firefighters, paramedics, and other such workers as listed in the Fact Sheet.
To minimize the risk of non-compliance consequences, you may need to engage in professional employee management tools. You will be able to automate some processes and monitor employee activities better for accurate tracking and assessment. For the best employee management tools and services, Push is your best friend.
We hope this helped cover all things exempt vs non exempt employee - happy managing!